January Effect in USDJPY (page 2 of 2)

A close above Friday's high was needed to confirm that and up until the US market open the outlook for the pound was promising. However a sharp sell-off began at 10am ET and within the next 4 hours, the British pound fell over 250 pips against the US dollar. The only explanation floating in the markets is liquidation out of carry trades. 2008 is expected to be a tough year for the British pound from both a technical and fundamental perspective. Weakness in the housing and financial market could lead to more layoffs. Read our 2008 technical and fundamental outlook for more on why we believe that the British pound will be headed for further losses in the coming year. Later this week we are expecting manufacturing, construction and service sector ISM reports.

Factors Driving Canadian, Australian and New Zealand Dollars Lower Today

The Canadian, Australian and New Zealand dollars are weaker across the board today for many reasons including a mild sell-off in commodity prices, broad US dollar strength and liquidation out of carry trades. Australian private sector credit was stronger than expected which has also helped since it indicates that borrowing has increased and spending will probably follow suit as well. Despite a recent interest rate hike from the RBA that took borrowing costs to an 11 year high, it has not stopped businesses such as miners from continue to doing all that it takes to meet the resource demand from countries like China. Australian manufacturing PMI is the only piece of data due for release over the next 24 hours. After that, there is no data from these three countries until Friday.

January Effect in USDJPY

Carry trade liquidation has caused major losses in all of the Japanese Yen crosses. There is no data expected from Japan this week, which means that the moves are largely driven by the losses in the Dow. Hopefully losses will not continue in the New Year because if the correlation between equities and carry trades hold, the January calendar effect in stocks could help to trigger a turn in the Yen crosses. Stocks tend to rise in the month of January because mutual funds, hedge funds and investors in general tend to initiate new positions in the stock market after having closed them for tax or window dressing purposes in December. We see a similar effect in USDJPY. Our January Seasonality Study indicates that USDJPY has strengthened in the month of January 8 out of the last 11 years.